The final bout

Seconds away, the climactic round of Blair <em>v</em> Brown. The euro is the immediate issue, but th

When members of the government say the following, it is time to take note: "We won't be like this in a year's time. Things can't go on as they are." The battle between the Prime Minister and his Chancellor is reaching its denouement. New Labour has always been a jungle and the two men at the top are wounded beasts. Tony Blair has virtually untrammelled powers, but virtually no political base. He derives his strength from a fiercely loyal central machine and from a political system that allows him to bypass the party that elected him.

With Clare Short gone, Gordon Brown now has few allies at the top. He has seen his hegemony in domestic policy chipped away. He is clinging on to his last remaining veto - the decision on the euro. He has diminishing powers but a consistently large political base that is increasingly eager for change.

On one point, the two sides converge - something has to give. They may be able to craft a compromise on the euro over the next two weeks without much more blood being spilt. Then what? Brown has fought hard to resist the two most important planks of Blair's public service reforms - tuition fees and foundation hospitals. His is an altogether different recipe for improving schools and hospitals. His is an altogether different vision of society.

First, the immediate battle: the haggling over the "not yet" assessment of the five economic tests for euro entry is acrimonious. Little headway is being made. As we went to press, they had not agreed on the timing, let alone the wording of the statement. With parliament due to go into its Whitsun mini-recess on 22 May and not to return until 3 June, they may go to the wire. Neither side conceals the tension. "At least they're talking, which is a start," said one official who has seen the two up close.

The euro battle is, in the words of another insider, "consuming everything". I am told that Brown decided at the last minute to make an important and generally positive speech on the future of Europe on 13 May in Brussels, just before his meeting with EU finance ministers. Brussels is not Brown's favourite town, so the event itself would have been noteworthy. The Centre for Economic Reform, a think-tank with very good links to Nos 10 and 11, was asked on 7 May to arrange it. The following day, after a discussion between Blair and Brown following cabinet - a discussion that, I am told, went particularly badly - the Chancellor's office decided not to proceed with the speech. The Brownites deny that any pressure was exerted by No 10. They say he preferred to air his ideas in an interview with GMTV on 11 May.

Brown has been keen for opportunities to "nail on the head" a misreading of his position. He is, he insists, a positive European. The pro-euro camp says such talk is a smokescreen for a hard "no" assessment. They juxtapose Brown's "obduracy" with Blair's "radicalism". That portrayal, however, does not stand up to scrutiny. Ever since the panicked compromise of 1997, in which the five economic tests were conjured, Blair has shirked the battle. Those pictures of him perched next to Michael Heseltine, Kenneth Clarke and Charles Kennedy at the launch of Britain in Europe in October 1999 now have a bathetic look to them. The frustration vented over the past week by euro advocates such as Chris Patten, Lord Simon and Simon Buckby, BiE's director, was designed to apply helpful pressure - "Blair usually appreciates the bashing we give him," says one. But it was also genuine. The Prime Minister has done nothing over the years to prepare the ground for a successful euro referendum, and those cabinet ministers who have tried, Peter Mandelson, Robin Cook and Stephen Byers, have for varying reasons all quit.

In the Treasury, the staff are reasonably relaxed when briefings are confined to what they describe as "Mandy Plus" - Mandelson plus a coterie of europhiles. It only bothers them when they feel that the backchat is being pushed from inside Downing Street, when they feel ministers are lined up to take pot-shots. With a reshuffle looming, certain cabinet members such as Helen Liddell, the Scottish Secretary, have tried to raise their profile by urging Brown to do the decent thing and not rule out a euro referendum in this parliament.

Six years into this government, Blair has his people where he wants them. Brown looks round the cabinet and sees ever fewer allies. Uncharacteristically, Blair is encouraging free and frank discussion because he knows that the majority at the table are on his side. And Brown has assured ministers that his assessment will be presented to the cabinet before there is a statement to parliament. But they smell a rat; they suspect they are expected to take part in a rubber-stamping exercise. They want a real discussion.

Brown's standing in the parliamentary party and the Labour movement is much stronger. The back benches are groaning with former ministers ready to challenge everything Blair represents.

Status counts for little. Twenty-four-hour news provides a platform for every dissenting MP. Those with a pedigree can find themselves with a media profile no lower than senior ministers enjoy. The old idea that former ministers gradually fade from public view no longer holds true - indeed, the reverse may now be the case. Many voters believe that former ministers - who know how things work but are free to speak their minds - carry more authority than ministers who promulgate the official message.

The Clare Shorts, Robin Cooks, Frank Dobsons and Chris Smiths are an inchoate group. They have varying objections and varying motivations. But over time, they could gel into something more threatening. This is Brown's problem and his opportunity. Short's demise illustrated that. For years, the two worked closely on the specifics of international development and debt and also on the broader political agenda. Where Blair indulged her in their many pow-wows, Brown dealt with her seriously. Short's machinations in the run-up to war and her "non-resignation" infuriated him. He distanced himself not only because he had to, but because he felt she had undermined herself and her cause.

War over, the damage was quietly repaired. Brown and Short began to talk again. They were talking again on the eve of her resignation. He and his people have tried to shore her up in the face of character assassinations in the media, which culminated in reports of Blair hinting that she had lost her marbles. In his GMTV interview, ostensibly about Europe, Brown found a way of showering her with praise. And yet he seems to have been taken aback by the actual timing of her decision to go on the Monday morning. The vehemence of her attack on Blair in the Commons and her suggestion that he should quit, and by implication hand over to Brown, did the Chancellor no favours.

Short jumped before she was almost certain to be pushed. Had she not backed down in March, she could have devastated the government. But even now, the effects should not be underestimated. Some in the new Labour vanguard are overjoyed. "Gordon is now entirely isolated. He's lost his last big friend," says one minister. Another takes a more historical, but similarly celebratory, view: "With Clare and Robin going, we now have closure on the Labour Party of the 1980s."

The only member of the cabinet who could conceivably be described as left-wing is Peter Hain. He was a staunch supporter of the war. He picks his moments carefully. Blair has a guarded relationship with him, promoting him finally to the cabinet at the last reshuffle but not giving him Short's job, something Hain would have done with alacrity and which would have given him a radical platform. Blair's understanding of radicalism, however, bears little resemblance to that held by most of his MPs.

The situation is in flux. Blair's popularity went up with the less discerning immediately after the war - people who preferred the big picture of military victory to the mere detail of the terms on which it was fought. Now it looks messy. The Americans are, as many predicted, botching the reconstruction of Iraq. The United Nations is barely getting a look-in. The legality of the occupation - Short's main point - is arguable, to say the least. As for the weapons of mass destruction, the government is now trying new conceits to explain why none may be found. It will get away with it. But what does it say about the Prime Minister, who may have taken us to war under false pretences?

Short's vituperative attack on Blair's presidential style somewhat missed the point. Brown's record at the Treasury does not suggest he would be more open, more collegiate. The issue for many Labour MPs and party members is different. It is not how Blair governs the country, but why. What is it that he is trying to achieve? And it is not about what place he will have in history - but what kind of Britain does he intend to leave behind? When the questions are framed in this way, the yawning gulf between Blair's world-view and Brown's is evident. Something, or someone, will have to give.